Edited version of your written advice

Authorisation Number: 1051336457578

Date of advice: 8 February 2018

Ruling

Subject: Genuine redundancy

Question

Is any part of a lump sum payment received by the Taxpayer a genuine redundancy payment in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Taxpayer was a member of the AB Redundancy Trust (ABRT).

ABRT is an Approved Worker Entitlement Trust that accepts redundancy contributions paid by participating employers for their employees.

In 2004, the Taxpayer commenced employment with the Employer.

In a letter, the Taxpayer’s employment with the Employer was terminated because their role was no longer required by the Employer. The termination was effective as a date in 2017.

Consequently, the Taxpayer was paid a benefit of from ABRT, from which tax was withheld. This resulted in the Taxpayer receiving a total payment of a certain amount.

ABRT Annual Report for the year ended 30 June 2016 states:

If you are made redundant or you terminate your employment you can claim your account balance by completing a member benefit claim form …

The ABRT Redundancy Benefit Claim form for states:

Upon redundancy the employee is legally entitled to receive a redundancy payment, as prescribed by the relevant award or enterprise agreement (whichever is applicable) or the amount that the employer has contributed into ABRT, whichever is the greater amount.

“Redundancy” means the termination or cessation of employment of an employee for any reason.

“Redundancy payments” are those paid by an employer that an employee is legally entitled to receive on termination as prescribed by the relevant award or enterprise agreement, or the amount the employer has contributed to ABRT whichever is greater.

The ABRT employer booklet, obtained from the ABRT website, states, at Page X:

All payments made by ABRT to Members are classified as Employment Termination Payments (ETP's) under the Income Tax Act and are therefore taxed accordingly.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 82-130(4).

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 paragraph 82-135(e).

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The payment the Taxpayer received from ABRT in consequence of the termination of his employment by reason of redundancy is not a genuine redundancy payment for the purposes of section 83-175 of the ITAA 1997 because it is not in excess of the amount he could have reasonably expected to receive had he terminated his employment voluntarily at that time.

Detailed reasoning

Genuine redundancy payments

A payment will qualify as a genuine redundancy payment if all the requirements under section 83-175 of the ITAA 1997 are satisfied.

In accordance with subsection 83-175(1) of the ITAA 1997, a genuine redundancy payment is:

a) so much of a payment received by an employee who is dismissed from employment because the employee's position is ‘genuinely redundant’

b) as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at the time of the dismissal.

The Commissioner has issued Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2), which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraph 11 of TR 2009/2 specifies four necessary components within the requirements under subsection 83-175(1) of the ITAA 1997:

● The payment being tested must be received in consequence of an employee's termination.

● That termination must involve the employee being dismissed from employment.

● That dismissal must be caused by the redundancy of the employee's position.

● The redundancy payment must be made genuinely because of a redundancy.

The information provided indicates that, in this case, the above components have been met and the termination of the Taxpayer’s employment was the result of genuine redundancy.

However, while it is accepted that the Taxpayer was dismissed by the Employer because their position was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that the Taxpayer would have received had they voluntarily resigned from their employment at the time of the dismissal.

Based on the information available, the payment received by the Taxpayer from ABRT after their employment was terminated by reason of redundancy is not greater that the benefit they would have received had they terminated their employment voluntarily at that time. That is, the Taxpayer would have received the same payment if their employment was terminated for any reason.

Consequently, subsection 83-175(1) of the ITAA 1997 has not been satisfied in the Taxpayer’s case.

Therefore, the payment received from ABRT is not a genuine redundancy payment as defined in section 83-175 of the ITAA 1997.